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    7 An Overview of Enterprise Resource Planning (ERP) Learning Objectives: + Tohave an idea about ERP; ¢ To know about Business Process Re-Engineering; ‘+ Todiscuss the process of ERP implementation; and ¢ Tounderstand the related issues with ERP. 7.0 Introduction In today's fiercely competitive business environment, there has to be much greater interaction between the customers and manufacturers. This means, in order to produce goods tailored to customer requirements and provide faster deliveries, the enterprise must be closely linked to both suppliers and customers. In order to achieve this improved delivery performance, decreased lead times within the enterprise and improved efficiency and effectiveness, manufacturers need to have efficient planning and control systems that enable very good synchronization and planning in all the processes of the organization. ‘Also, it requires a strong integration across the value chain. Hence, there is a need for a standard software package, which equips the enterprise with the necessary capabilities to integrate and synchronize the isolated functions into streamlined business processes in order to gain a competitive edge in the volatile business environment. Most organisations across the world have realised that in a rapidly changing environment, it is impossible to create and maintain a custom-designed software package, which will cater to all their requirements, and be up-to-date. Realising the requirement of user organisations, some of the leading software companies have designed Enterprise Resource Planning software, which offers an integrated software solution to all the funetions of an organisation. Enterprise Resource Planning (ERP) is the latest high-end solution, information technology has lent to business applications. The ERP solutions seek to streamline and integrate ‘operation processes and information flows in the company to synergise the resources of an ‘organisation namely men, material, money and machine through information. — Initially implementation of an ERP package was possible only for large multi nationals and infrastructure companies due to high cost. Today, many companies in India have gone in for implementation of ERP. It is expected that in the near future, 60 per cent of the companies will © The Institute of Chartered Accountants of India 1. Information Systems Control and Audit be implementing one or the other ERP packages since this will become a must for gaining competitive advantage, 7.1 ERP-Definition ‘An Enterprise resource planning system is a fully integrated business management system covering functional areas of an enterprise like Logistics, Production, Finance, Accounting and Human Resources. It organizes and integrates operation processes and information flows to make optimum use of resources such as men, material, money and machine. ERP is a global, tightly integrated closed loop business solution package and is multifaceted. In simple words, Enterprise resource planning promises one database, one application, and ‘one user interface for the entire enterprise, where once disparate systems ruled manufacturing, distribution, finance and sales. Taking information from every function ‘tis a tool that assists employees and managers plan, monitor and control the entire business. A modem ERP system enhances a manufacturer abilty to accurately schedule production, fully ulilize capacity, reduce inventory, and meet promised shipping dates. Workflow Automation Electronic Data Interchange ‘A general model of ERP is shown in Fig. 1. Fig 7.1.4 : General Model of ERP 1. Business Planning Materials Business Planning Resources New product + Tnteligentresoure planning * Existing product CENTRALDATABASE + j1uman Resource Planing * BillofMateral Organisation SiG ameaeat * ProdvetPricing Payroll/ Employee * Long term forecasting Jobprojet Management * Capacity planning Cost Accounting Facilities Maintenance, Plan + EnginceringChangeManagement| }* Aecountsreceivable ning & implementation ‘Accounts payable * Ordermanagement General ledger * Distbution management Fixedassets [& Operational Planning & Budgetary Execution resources ZOperationPlaoning& Execution] |* Inventory Recruitment Materials Logistcs/Distibution | |* Payroll *Taventory of materials * Job evaluation and. Perfor- + Orderprocessing mance appraisal * Supplier management Cross Funetionalites| * Costingand Budgeting * Inventory hwarchouse + Multiplatform ‘Quality contol an planing Management + Multtaciliy * Maintenance Engineering & * Forecasting * Multimode Scheduling * Distribution Management manufacturing + Fixed Assets + Scheduling * Muliicurteney + Resource MIS * Multilingual + Imaging * Database cretion * Eletronie mail tute of Chartered Accountants of India An Overview of Enterprise Resource Planning (ERP) _7.3 7.4.4. Evolution of ERP : In the ever-growing business environment, the following demands are placed on the industry. Aggressive cost control initiatives + Need to analyse costsirevenues on a product or customer basis ‘+ Flexibility to respond to changing business requirements + More informed management decision making ‘© Changes in ways of doing business. The difficulty in getting accurate data, timely information and proper interface of complex business functions have been identified as the hurdles in the growth of any business. Time and again, depending on the velocity of the growing business needs, one or the other applications and planning systems have been introduced into the business world for crossing these hurdles and achieving growth. They are ‘+ Management Information Systems (MIS) ‘Integrated Information Systems (IIS) ‘© Executive Information Systems (EIS) ‘© Corporate Information Systems (CIS) ‘© Enterprise Wide Systems (EWS) ‘© Material Resource Planning (MRP) © Manufacturing Resource Planning (MRP I!) ‘+ Money Resource Planning (MRP II!) ERP has evolved from the system known as MRPII (Manufacturing Requirement planning) system with the integration of information between Vendor, Customer and Manufacturer using networks such as LAN, WAN and INTERNET ete. MRPII system again evolved from MRP (Material Requirement Planning) system. MRP is a technique that explodes the end product demands obtained from Master Production Schedule (MPS) for the given product structure which is taken from Bill of Material (BOM) into a schedule of planned orders considering the inventory in hand. MRP system processes this data and provides valuable guidelines to the scheduler in the form of work orders to plan the Production Schedule. The net requirements for each item are computed and replenishment orders are created and planned for release. MRP system provides reports such as MRP reports, Planned Order releases for Purchase ‘orders, Work Orders, Reschedule open orders report, Fitm planned reports, Shortages report etc. MRP is considered as an important planning and manufacturing control activity for materials. MRPII is a method for planning of all the resources of the manufacturing company. It involves all operational and financial planning and has simulation capabilities to answer ‘WHAT IF” ‘questions. It inks different functional areas like Business Planning, Production Planning, MPS, 7.4 Inform ‘Systems Control and Audit MRP, Capacity Requirement Planning and Execution system for capacity and priority. Output from these systems is integrated with Financial Reports such as Business Plan, Purchase, Shipping, Budget, and Inventory for production etc. MRPII has @ number of drawbacks. The main problem is that it has not been able to effectively integrate the diferent functional areas to share the resources effectively ERP as the name indicates is the integration of Enterprise Resources, The ERP package works on the fundamental premise that the whole being greater than the sum of its parts. It provides an integrated information storehouse where information needs to be stored only once and can be further processed and reported to anyone in the value chain The traditional application systems, which the organizations generally employ, treat each transaction separately. They are built around the strong boundaries of specific functions that a specific application is meant to cater. For an ERP, it stops treating these transactions separately as stand-alone activities and considers them to be the part of the inter-linked processes that make up the business. Almost all the typical application systems are nothing but the data manipulation tools. They store data, process them and present them in the appropriate form whenever requested by the user. In this process, the only problem is that there is no link between the application systems being used by different departments. An ERP system also does the same thing, but in a different manner. There are hundreds of such data tables, which store data generated as a result of diverse transactions, but they are not confined to any departmental or functional boundaries, but rather integrated to be used by multiple users, for multiple purposes and at multiple places, 7.4.2. Enabling Technologies : It is not possible to think of an ERP system without sophisticated information technology infrastructure. It is said that, the earlier ERP systems were built only to work with huge mainframe computers. The new era of PC, advent of client server technology and scalable Relational Database Management Systems (RDBMS), all have contributed for the ease of deployment of ERP systems. Most of the ERP systems exploit the power of Three Tier Client Server Architecture. In a client server environment, the server stores the data, maintaining its integrity and consistency and processes the requests of the user from the client desktops. The load of data processing and application logic is divided between the server and the client. The three-tier architecture adds a middle stratum, embodying all application logic and the business rules that are not part of the application, enforcing appropriate validation checks. It is assumed that the companies implementing ERP solutions have multiple locations of ‘operation and control. Hence, the online data transfer has to be done across locations. To facilitate these transactions, the other important enabling technologies for ERP systems are Workflow, Work group, Group Ware, Electronic Data Interchange (EDI), Internet, Intranet, Data warehousing, ete. 7.1.3 ERP Characteristics : An ERP system is not only the integration of various ‘organization processes. Any system has to possess few key characteristics to qualify for a true ERP solution. These features are: An Overview of Enterprise Resource Planning (ERP) _7.5 Flexibility : An ERP system should be flexible to respond to the changing needs of an enterprise. The client server technology enables ERP to run across various database back ‘ends through Open Database Connectivity (ODBC). Modular & Open : ERP system has to have open system architecture. This means that any module can be interfaced or detached whenever required without affecting the other modules. It should support multiple hardware platforms for the companies having heterogeneous collection of systems. It must support some third party add-ons also. Comprehensive : It should be able to support variety of organizational functions and must be suitable for a wide range of business organizations. Beyond The Company : It should not be confined to the organizational boundaries, rather support the on-line connectivity to the other business entities of the organization, Best Business Practices : It must have a collection of the best business processes applicable worldwide, An ERP package imposes its own logic on a company’s strategy, culture ‘and organisation, 7.4.4 Features of ERP : Some of the major features of ERP and what ERP can do for the business system are + ERP provides multi-platform, mult: multilingual facilities. cility, multi-mode manufacturing, multi-currency, ‘* It'supports strategic and business planning activities, operational planning and execution activities, creation of Materials and Resources. All these functions are effectively integrated for flow and update of information immediately upon entry of any information + Has end to end Supply Chain Management to optimize the overall Demand and Supply Data. ‘+ ERP facilitates company-wide Integrated Information System covering all functional areas like manufacturing, selling and distribution, payables, receivables, inventory, accounts, human resources, purchases etc. ‘© ERP performs core activities and increases customer service, thereby augmenting the corporate image. ‘+ ERP bridges the information gap across organisations. ‘+ ERP provides complete integration of systems not only across departments but also ‘across companies under the same management, ‘© ERPis the solution for better project management ‘+ ERP allows automatic introduction of the latest technologies like Electronic Fund Transfer (EFT), Electronic Data Interchange (EDI), Internet, Intranet, Video conferencing, E-Commerce etc. © ERP climinates most business problems like material shortages, productivity enhancements, customer service, cash management, inventory problems, quality problems, prompt delivery et. 7.6 ___ Informal n Systems Control and Audit + ERP provides inteligent business tools like decision support system, Executive information system, Data mining and easy working systems to enable better decisions. 7.4.5 Why Companies Undertake ERP © Integrate + As the CEO tries to understand the company’s overall performance, he may find many different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different business units may each have their own version of how much they contributed to revenue. ERP creates a single version ofthe truth that cannot be questioned because everyone is using the same system, ‘+ Integrate customer order information : ERP systems can become the place where the customer order lives from the time a customer service representative receives it until the loading dock ships the merchandise and finance sends an invoice. By having this information in one software system, rather than scattered among many different systems that can't communicate with one another, companies can keep track of orders more easily, and coordinate manufacturing, inventory and shipping among many different locations simultaneously + Standardise and speed up manufacturing processes : Manufacturing companies - especially those with an appetite for mergers and acquisitions—often find that multiple business units across the company make the same transaction! recording/ report using different methods and computer systems. ERP systems come with standard methods for automating some of the steps of a manufacturing process. Standardising those processes and using a single, integrated computer system can save time, productivity and reduce headcount. ‘© Reduce inventory : ERP helps the manufacturing process flow more smoothly, and it improves visibilty of the order fulfilment process inside the company. That can lead to reduced inventories of the materials used to make products (work-in-progress inventory), and it can help users better plan deliveries to customers, reducing the finished good inventory at the warehouses and shipping docks. To really improve the flow of your supply chain, you need supply chain software, but ERP helps too, ‘+ Standardise HR information : Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employees’ time and communicating with them about benefits and services. ERP can fix that 7.4.6 Benefits of ERP : The benefits accruing to any business enterprise by implementing an ERP package are unlimited. According to companies like Nike, DHL, Tektronix, Fujitsu, Millipore, and Sun Microsystems, the following are some of the benefits they achieved by implementing the ERP packages Gives Accounts Payable personnel increased control of invoicing and payment processing and thereby boosting their productivity and eliminating their reliance on ‘computer personnel for these operations, ‘+ Reduce paper documents by providing on-line formats for quickly entering and retrieving information. An Overview of Enterprise Resource Planning (ERP) _7.7 Improves timeliness of information by permitting posting daily instead of monthly. Greater accuracy of information with detailed content, better presentation, satisfactory for the auditors. Improved cost control Faster response and follow-up on customers. More efficient cash collection, say, material reduction in delay in payments by customers. Better monitoring and quicker resolution of queries. Enables quick response to change in business operations and market conditions. Helps to achieve competitive advantage by improving its business process, Improves supply-demand linkage with remote locations and branches in different countries Provides a unified customer database usable by all applications, Improves International operations by supporting a variety of tax structures, invoicing schemes, multiple currencies, multiple period accounting and languages. Improves information access and management throughout the enterprise, Provides solution for problems like Y2K and Single Monetary Unit (SMU) or Euro Currency. 7.2 Business Process Reengineering (BPR) ERP is a result of a modern Enterprise's concept of how the Information System is to be configured to the challenging environments of new business opportunities. However merely putting in place an information system is not enough. Every company that intends to implement ERP has to reengineer its processes in one form or the other. This process is known as Business Process Reengineering (BPR). Table 1 : Some Typical processes with descriptions Process Description Forecasting Shows sales, Fund Flows etc over a long period of time say next two years Fund management | The necessity of funds and the way to raise these funds. Uncertainty and Risk factors to be considered. Simulation with “What if type analysis Price Planning Determines the price at which products are offered. Involves application of technology to pricing support such as commercial database services. Also feedback and sensitivity analysis Budget Allocation Using computerised algorithms to estimate desirable mix of funds allocated to various functions. 7.8__ Inform ‘Systems Control and Audit Material requirement | Process of making new products from raw materials and include planning production scheduling, requirement planning. Also activities for monitoring and planning of actual production. Quality control Takes care of activities to ensure that the products are of desired quality. 7.2.4 What is BPR? The most accepted and formal definition for BPR, given by Hammer and Champhy is reproduced here: “ BPR is the fundamental rethinking and radical redesign of processes to achieve dramatic improvement, in critical, contemporary measures of performance such as cost, quality, service and speed,” This has a few important key words, which need clear understanding. Here, dramatic achievement means to achieve 80% or 90% reduction (in say, delivery time, work in progress or rejection rate) and not just 5%, 10% reduction. This is possible only by making major improvements and breakthroughs, and not small incremental changes (ike those in Total Quality Management (TQM) or suggestion schemes). Radical redesign means BPR is reinventing and not enhancing or improving. In a nutshell, a “cleansiate approach’ of BPR says that ‘Whatever you were doing in the past is all wrong’, do not get biased by it or reassemble you new system to redesign it afresh. Fundamental rethinking means asking the question “why do you do what you do’, thereby eliminating business process altogether if it does not add any value to the customer. There is no point in simplifying or automating a business process which does not add any value to the customer. A class example is that of asking for an invoice from the supplier for payment when the company has already received and accepted a particular quantity of materials physically and at an agreed price. Receiving, processing, and filing of invoices add no value to customer and makes only the supplier unhappy for delayed payments. Thus, BPR aims at major transformation of the business processes to achieve Dramatic improvement. Here, the business objectives of the Enterprise (e.g, profits, customer-satisfaction through optimal cost, {quaity, deliveries etc.) are achieved by “transformation” of the business processes which may, ‘or may not, require the use of Information Technology (IT). 7.2.2 Business Engineering : Business Engineering has come out of merging of two concepts namely Information Technology and Business Process Reengineering, Business Engineering isthe rethinking of Business Processes to improve speed, quality and output ‘of materials or services. The emphasis of business engineering is the concept of Process Oriented Business Solutions enhanced by the Client-Server computing in Information Technology. The main Point in business engineering is the efficient redesigning of company’s value added chains. Value added chains are a series of connected steps running through a business which when efficiently completed add value to enterprise and customers. Information technology helps to develop business models, which assist in redesigning of business processes. Business Engineering is the method of development of business processes according to changing requirements. An Overview of Enterprise Resource Planning (ERP) _7.9 7.2.3 Business Management : ERP merges very well with common business management issues like Business Process Reengineering, total quality management, mass customisation, service orientation, and virtual corporation etc. The basic objective of implementing an ERP program is to put in place the applications and infrastructure architecture that effectively and completely support the Enterprise's business plan and business processes. When an ‘enterprise does not have optimized business processes, the ERP implementation needs a process reengineering which enable to capture knowledge of the experts into the system thus gaining considerable benefits in productivity. The first step in implementation of ERP is the development of a Business process model showing business process as one large system and the interconnection and sequence of business subsystems or processes that drive it 7.2.4 Business Modelling : The approach of ERP implementation is carried out using MIS planning. First of all, a model consisting of core business processes or activities of the business is to be developed. This is the diagrammatic representation of Business as a large system with interconnection of subsystems or processes that it comprises of. A typical layout is shown in Figure 2. The planning to arrive at the process is from top down whereas the MIS implementation is done from bottom up. We can model Business as a system making the processes managing thei facilities and material as their resources. Information is treated as a vital resource managing other resources. Features Business Processes Comprehensive functionality R/3 System ‘© Designed for all types of Client Server Architecture business AGAPYT Programming Multi-national Language Business engineering Client server architecture Open System Fig 7. The Data model consists of two elements. : SAP Modules 1. A diagram describing various Business processes and their interactions. 2. Anunderlying Data Model 7.40 _ Informal n Systems Control and Audit The Reference model can be used by various companies to list their processes and data entities and if required can be subsequently modified to suit specific nature of requirements. Some typical examples are shown in table 2 Table 2 : List of some of the entities forming a data model Entity Description External Data Entities outside the firm that interact with it such as customers, suppliers, competitors and distributors. Also includes predictive data regarding economy and future events in external environment. Internal Data Data generated from the firm's transaction processing system, internal forecasts or parameters monitored Funding Data Includes information on specific sources of funds as well as availabilty terms and conditions etc. Marketing Research Data | Mainly consumer related data that can be used to support marketing decisions and result of surveys. Production Data Shop floor data on production processes including standards and actual of time and material resources concerned Inventory data Includes inventories of raw materials goods in progress and finished goods. Personnel data Mostly includes profiles of employees, their skill levels, experience and past performance on various assignments Sales forecast Product-wise and period-wise forecast for various products sold by the company. Payroll data Data about salaries, tax deductions, statutory forms and other deductions General Ledger Integrated transaction data from pay roll and account receivable. Its the basis for budgeting and planning data. The general principles of Business Process Analysis and classification and methodology of looking at a Business Information system to support a series of interlocking subsystems are Universally applicable. 7.25 Business modeling in practice : Most of the ERP packages available today enable flow charting business processes using standard flow chart symbols. By connecting symbols Used for users, events, tasks/functions, and other organizational information, complex business information can be analysed .For example SAP which is @ popular ERP package uses event driven process chain (EPC) methodology to model Business Process. All ERP packages provide standard template for each of the processes so that actual processes can be compared and deviations analysed. With the help of the business model, itis possible to check as to how well the model fits into the application so that the degree of suitabilty of the An Overview of Enterprise Resource Planning (ERP) 7.11 ERP package can be assessed. Business Modeling is the basis by which one can select and implement a suitable ERP package. 7.3 ERP Implementation ERP implementation is a special event in an organisation. It brings together in one platform, different business functions, different personalities, procedures, ideologies and philosophies with an aim to pool knowledge base to effectively integrate and bring worthwhile and beneficial changes throughout the organization. Implementation of ERP is a risky effort since it involves considerable amount of time, efforts and valuable resources. Even with all these, the success of an implementation is not guaranteed The success of an implementation mainly depends on how closely the implementation consultants, Users and vendors work together to achieve the overall objectives of the organisation. The implementation consultants have to understand the needs ofthe users, understand the prevailing business realties and design the business solutions keeping in mind all these factor. tis the users who will be driving the implementation and therefore their active involvement at all stages of implementation is vital forthe overall success of implementation. ‘An ERP package after implementation is expected to improve the flow of information and formalize and standardize all the business processes and workflow that exist in an enterprise. However the workload of users may not decrease. It is worthwhile to remember that ERP is an enabling tool, which makes one do his work better, which naturally need additional efforts. During the course of implementation the standard package may undergo changes which may be a simple one or a major ‘functionality’ change. Implementing such changes is known as Customization. The contents of the package are known as modules and the modules are further divided into Components. However, itis always better to satisfy user requirements and overall objectives within the available framework of the existing package because any change in any functional module will have an adverse impact on the functioning of the other modules of the package. Maximum benefit will be available only when the standard package is implemented in totality with an aim for optimised use. The roles and responsibilities of the employees have to be clearly identified, understood and configured in the system. The employees will have to accept new processes and procedures laid down in the ERP system. At the same time these processes and procedures have to be simple and user friendly. The ability of the ERP package to manage and support dynamically changing business processes is a critical requirement for the organisation and therefore the package should be expandable and adaptable to meet these changes, ‘A well managed and implemented ERP package can give a 200 percent return on investment where as a poorly implemented one can yield a return on investment as low as 25 percent. 7.3.4 Key Planning and Implementation decisions This discussion looks at a number of the key decisions that need to be made when considering an enterprise integration effort. 7.42__ Informal n Systems Control and Audit > ERP or Not to ERP? The decision to implement an ERP should be based on a business case rational. Possible business cases involve technology, process improvements, productivity improvements and strategic consideration Technology justifications include the need to address the Y2K problem (in most cases, this is no longer applicable), integrate the functions of disparate systems, replace poor-quality existing systems and merge acquisitions with new capabilities such as web accessibility into the business environment. Process improvements address actions that result in personal and IT cost reductions. Productivity improvements include the need to close the financial cycle and increase the overall production from an enterprise standpoint. Strategic. considerations address the ability to implement new strategies not supported by the current software, improve customer service and satisfaction, respond to competitive pressures and enhance customer responsiveness. > Follow Software's Processes or Customize? This key decision may determine the success or failure of the ERP effort. Ifthe organization ‘decides to follow the process of the software, this will result in the organization following best practices within its sector, thereby giving it a chance to improve and standardize their processes. This approach will also facilitate future change to the ERP software. However, this approach can create significant turmoil by requiring employees to change their ways of doing business If the organization decides to stick with its current processes and customize the software to fit these processes, the organization obviously will not have to experience the pain and stress associated with changing its process. However, it will be very costly to customize and maintained the software over time. Interfaces modular compatibility needs to be sustained > Inhouse or Outsource? Outsourcing has the advantage of allowing the organization to continue to focus on its core mmission, avoid a relative substantial financial commitment (in some cases) and minimize the impact on the MIS department. On the downside, providing opportunities to those extemal to the organization may poorly impact employee morale and may give rise to security issues. The upsides to an in-house implementation include: a better match between the software and the business, applications optimized for the organization and better maintained security. However, an in-house approach cannot be accomplished if there is a lack of internal expertise ‘and personnel to support such an effort. > “Big Bang” or Phased Implementation? ‘A *big bang" implementation involves having all modules at all locations implemented at the same time. Characteristics of this approach include no need for temporary interfaces, limited requirement to maintain legacy software, cross-module functionality and overall cost if no contingencies arise Phased implementation one or a group at a time, often a single location at a time. Benefits of this approach include: a smoothing of resource requirements, an ability to focus on a particular An Overview of Enterprise Resource Planning (ERP) _7.13 module, avail-abilty of existing legacy systems as a fall-back, reduced risk, the knowledge gained with each phase and the usefulness of demonstrable working system. Other implementation approaches include: The wave approach : This approach involves the application of different waves of change to

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